Microsoft Sets Deadline for Yahoo Deal

Yahoo has held talks with News Corp and Time Warner's AOL division about possible deals, but those discussions appear to have yielded nothing yet.

A Yahoo investor, whose firm met with Yahoo management earlier this week and declined to be identified, said the company emphasized the deal with Microsoft involved regulatory risks that would undercut a merger's potential value.

The management, according to the investor, presented alliances with AOL and Google as possibly better options.

Brendan Barnicle, who follows Microsoft for Pacific Crest Securities, said that by removing the hope of a higher bid, Microsoft had given Yahoo directors the legal cover to accept Microsoft's existing offer and fend off shareholder lawsuits.

It's part of a highly choreographed dance and parallels the take-it-or-leave-it bidding strategy Oracle Corp has used to win a string of deals to consolidate the software industry.

"The big overhang on Microsoft stock has been that they would have to raise their bid," Barnicle said.

Sinking Value

Yahoo has adopted measures that make a merger with Microsoft more costly, Ballmer complained.

A few weeks after Microsoft's offer, Yahoo's board put in place a generous severance plan, commonly known as a "golden parachute," to all employees if the company was sold.

The original 62 percent premium to Yahoo's share price on the day the offer was announced has declined.

Yahoo shares closed on Friday at $28.36 each, while Microsoft ended the week at $29.16. Both trade on Nasdaq.

Based on Friday's closing price, the premium to Yahoo's stock is about 45 percent, while the current total value of Microsoft's offer is $42.2 billion in cash and stock.

Microsoft has argued that the offer's premium to Yahoo's stock has, in fact, increased, because the Web pioneer's stock would have fallen in lock-step with its online rivals. Shares of Google, Yahoo's most direct competitor, have fallen more than 16 percent since Microsoft's offer.

Microsoft's view of business conditions at Yahoo runs contrary to Yahoo's own outlook for itself. Last month, the company went public with a rosy revenue outlook for the next two years and appealed directly to shareholders during a road show that Microsoft's offer was not enough.